Subprime credit, idiosyncratic risk, and foreclosures

In this paper, we look at the determinants of foreclosure rates with particular attention to measures such as household leverage, which is related to subprime credit population, and idiosyncratic risk, which utilizes a spatial delineation of housing submarkets. We use county-level data from the state of California and provide a number of important findings regarding the determinants of foreclosures across housing submarkets. We find a significant negative relationship between foreclosures and both housing price growth and idiosyncratic risk, and a positive relationship between foreclosures and household leverage. These relationships persist even after we control for state variables such as tech pulse, mortgage rate spread, median household income, and unemployment rate. We show a breakdown of the cross-sectional variability of foreclosure rates by allowing a two-way sorting of the counties using housing price growth and idiosyncratic risk. The idiosyncratic risk measure reemphasizes the translation of leverage-induced shocks into foreclosure rates. (c) 2019 Board of Trustees of the University of Illinois. Published by Elsevier Inc. All rights reserved.